Twin towers: the 3.6 billion question arising from the World Trade Center attacks; was it one "occurrence" or more than one? There are complexities galore that are bound to arise in the insurance context.

• Author: Aylward, Michael F.

IN THE aftermath of the September 11, 2002, attacks on the World Trade Center in New York City, various questions have been raised with respect to the availability of insurance coverage to pay for losses caused by the attacks. Issues have surfaced with respect to the appropriate period of business interruption, the impact of "civil authority" wordings in the insurance policies, and the potential impact of "war risk" exclusions, just to name a few. Yet none of these questions promises to have as dramatic a financial impact on the insurance industry as the issue of whether collective acts of terrorism should be viewed separately or together in evaluating the numbers of "occurrences" or policy limits available to satisfy covered losses.

The outlines of this dispute are already apparent. Several cases are pending in the U.S. District Court for the Southern District of New York between a consortium of investors led by Larry Silverstein, which acquired a 99-year lease to operate the World Trade Center only weeks before the disaster, and its property insurers with respect to whether the total available insurance for damage to the buildings within the WTC complex is the $3.5 billion policy limit, as the insurers contend, or, as the insured contends, a separate limit is available for each tower.

Complicating an early analysis of these issues is a recent ruling of the New York Court of Appeals that seems to offer something for everyone. In Travelers Casualty and Surety Co. v. Certain Underwriters at Lloyd's of London, (1) the court ruled that a general liability insurer could not aggregate separate pollution incidents for reinsurance purposes. Insofar as the losses involved discrete pollution problems that had occurred in different parts of the United States at diverse times between the 1920s and the 1990s, the court ruled that they could not be treated as having any common causative origin.

The multiple events analysis in Travelers would seem to support the insured's position in the WTC dispute. Yet, Travelers, as with earlier New York precedents, arguably also sets forth a blueprint for treating the events of the twin towers attacks as a single event for insurance purposes. In particular, the Travelers court's focus on whether the underlying claims were closely linked in time and space, while mandating multiple reinsurance events in that case, presumably would support a finding that adjoining buildings that toppled within minutes of each other as a practical and physical consequence of two coordinated blows to their structure would constitute a single "occurrence."

What are the likely parameters of this debate? There are few clear guideposts in this area of the law. How many "occurrences" will result from these terrorist acts, like the event itself, is largely unprecedented.

SEPTEMBER 11, 2001

From ground breaking in 1966 until ribbon cutting in 1973, the World Trade Center is composed of seven separate buildings, most notably the twin towers. In July 2001, a consortium of individuals and corporate investors led by Silverstein acquired a 99-year lease to Buildings 1, 2, 4 and 5 in the WTC complex.

On the morning of September 11, 2001, teams of terrorists hijacked two Boeing 767s en route from Boston's Logan Airport to Los Angeles and crashed them into the north and south towers, which are designated as Buildings 1 and 2.

American Airlines Flight 11 struck first, hitting the north tower (One World Trade Center) at 8:45 a.m. Eighteen minutes later, United Flight 175 struck the south tower (Two World Trade Center). The south tower collapsed at 9:59 a.m., followed by the north tower a half hour later at 10:28 a.m. A third building collapsed at 5:20 p.m., after burning out of control for eight hours. Other buildings in the complex also suffered structural damage.

At the time of the events, the World Trade Center was insured under a multi-layer $3.5 billion first-party policy that had been placed for the insured by its broker, Willis Limited. Swiss Re, one of the major participants in the first-party program filed suit against the owners and operators of the World Trade Center in the U.S. District Court for the Southern District of New York on October 22, 2001, seeking a declaration that the most it owed was a single "occurrence" limit and seeking guidance from the court with respect to the priority of payment as to various claimants under the policy. (2) The complaint accuses Larry Silverstein of making "audacious" coverage arguments through the press to the effect that the policyholders are entitled to double the face value of this coverage.

The WTC policy appears not to have been issued as of September 11, 2001. As a result, the contractual terms are in dispute. Paragraph 31 of Swiss Re's complaint asserts that the Willis placing slip contained various proposed terms and conditions, including this definition of "occurrence:"

"Occurrence" shall mean all losses or damage that are attributable directly or indirectly to one cause or to one series of similar causes. All such losses will be added together and the total amount of such losses will be treated as one occurrence irrespective of the period of time or area over which such losses occur. It is by no means certain whether this language ultimately will govern, however, as the policyholder apparently now is asserting through Paragraph 37 of the complaint that the participants in the $3.5 billion layer must follow the terms and conditions of the $10 million primary layer that was underwritten by a group of insurers led by Travelers. The case has been assigned to Judge John S. Martin Jr., a senior federal district judge who has had extensive experience in complex insurance cases over the years.

In late 2001, Silverstein amended his counterclaim to add other insurers who had underwritten layers in the policy, including Allianz, Chubb, and various Lloyd's interests. A trial date of September 3, 2002 has been set.

Also in late 2001, the World Trade Center filed a separate action against Travelers, whose policy lacks any special definition of "occurrence." Within a matter of weeks, Silverstein moved for summary judgment, arguing that the destruction of each tower was a separate "occurrence" under the Travelers policy. The summary judgment brief filed in January of this year argues that the "terrorist plan" was not the proximate cause of the losses and was, at best, a remote cause "of no consequence." Rather, Silverstein contends that New York courts should consider only the "immediate physical cause of the loss" and need not consider remote causes. Citing the Second Circuit's decision in Pan American World Airways v. Aetna Casualty & Surety Co., (3) the insured argues that "remote causes of losses are not relevant in the characterization of an insurance loss."

Silverstein also notes that when it suited its purposes, Travelers contended for multiple occurrences in the Ninth Circuit litigation in Lexington Insurance Co. v. Travelers Indemnity Co. (4) Following the analysis in Lexington, the insured points out that the federal indictment filed following the September 11 events "lists each of the hijackings of the two airplanes that hit each of the twin towers as a separate `overt act' of criminal conspiracy."

Travelers is due to respond in April 2002 and is expected to argue that the collapse of the first tower necessarily "caused" the collapse of the second, given their common foundation and infrastructure.

MEASURING "OCCURRENCES"

1. Are Liability Cases Useful Precedent?

   Although there are hundreds of cases construing the number of "occurrences" involving liability claims, only a handful of courts have addressed this issue in the context of first-party policies. In the absence of first-party precedent, some courts have adopted the "cause" test as a general principle for resolving multiple "occurrences" claims under other types of insurance policies. (5)

   At least one court, however, has contended that the "cause" test may conflict with the "business purpose" of property insurance. In Newmont Mines Ltd. v. Hanover Insurance Co., the Second Circuit observed that whereas the cause of the insured's liabilities might be an appropriate focus for third-party coverage, the subject matter of first-party insurance is the damaged property itself:

   In the liability context, we have found that the selection of a "per occurrence" basis and the corresponding rejection of a "per claim" basis indicated that the liability policy was not intended to gauge coverage on the basis of individual accidents giving rise to claims, but rather on the underlying circumstances which resulted in the claims for damages. A liability policy is intended to protect an individual or a business from liability for their tortious conduct. Consequently, since that is the "business purpose sought to be achieved by the parties," it is eminently reasonable to look to the underlying conduct or cause of that liability. On the other hand, when construing a property damage policy, as we are here, the business purpose sought to be achieved by the parties is considerably different. The goal of such a policy, simply stated, is to...